IFRS vs US GAAP - Top Differences that you Must Know! - YouTube

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clicking the bell ican friends today we are going to learn tutorial on I

IFRS vs US GAAP an ongoing discussion and it's never ending see before we

differentiate between IFRS and US GAAP it's important to understand their

meaning and the context in which this two terms are used wait a minute

are they not set of accounting standard no not exactly the US GAAP and IFRS classified are

technically classified as generally accepted accounting principles which in

the financial and accounting word is commonly known as gaap so in this

tutorial we are going to learn couple of things we'll start with what is exactly

gaap the first question what is gaap see gaap our broad framework or the structure

which is used to prepare financial statement of the company like you know

have you heard about Java C++ or HTML are used by these software engineers to

write computer programs in the same manner accountants all over the world

use a language that is known as gaap to prepare the financial statement but

there is a one huge difference between the computer language in gaap unlike a

programmer who uses the same language irrespective of whether he is sitting in

Silicon Valley or Shanghai an accountant will use the different reporting

language in different jurisdiction because every country has different gaap

every country has different gaap like for example account in India is used in

India it IGAAP it is known as IGAAP generally accepted accounting principles

in India the one sitting in United States that has US they use what US

GAAP and it is known as generally accepted accounting principles in US

and there is one in UK which is known as UK gaap which is used in preparation of

the financial statement or the books of accounts

so the one question arise that why this is just an example and the other

countries use IFRS in general so I'll right for others over here so why

they use different gaap see why accountant in different jurisdiction

uses different reporting language or gaap well different gaap are used because

every country is governed by different set of very important laws though various

laws you can say that your incomes in Income Tax Act Companies Act sounds

similar but they very in a great detail amongst each other criminal law that is

applicable in UK and US may sound similar but it in its section provisions

and clauses and sub-clauses very in great detail between them differences

arises because of the diversity in language ethnicity culture and above all

the customs and practices hence to accommodate all this there arises the

need to have a different set of laws in different countries and this is also

applicable for the business and financial acts as a business environment

and practice is also vary greatly between the nations

hence various country follow its own reporting language or gaaps like IGAAP

US GAAP UK GAAP and so on and so forth so we have learned why now I want to

make you understand the impact of difference in the gap imagine you

yourself to be oh let's say you consider that you are a private equity hedge fund

manager also you're a private equity fund manager having millions in the

coffers to invest so what would you like to do first before investing well there

could be many answers to this question but most of you would definitely agree

with me that you know you would be you would like to have a look at the

financial health which is known as the balance sheet and profit and loss

account of those companies so after searching through many good companies

you finally came across newly established company let's say pine apple

inc and that's a new company for you pine apple inc sells smartphones and in

order to capture the existing market in the emerging countries like India it

sells its products at a discount let's assume buying Apple sales

smartphones at a cash discount of let's say 20% so for simplicity

let's also assume that it has sold close enough to 50000 phones annually

in both India and us whose market prices let's say close enough to $125

so how much you expect the recorded revenue in the books of accounts of the

pineapple Inc in its holding company in US and subsidiary in India well one

would think that close enough to $5,00,000 or $5 million dollar is the

revenue earned by the company in both US in India so the discounted price equals

to 125 is a share price and if you deduct 20% if you deduct 20%

from that what you get $100 okay so 50000 x 100 will

give you $5 million so you are right in pointing out that the company earned

$5 million in u.s. and India but revenue recorded in the books of

account will be different in US in India I just right for you we here in u.s. what

will happen a company pineapple revenue will be recorded at $5 million

but in India what will happen that Indian subsidiary of pineapple revenue

will be recorded at 6.25 million that is 50000 into

125 well that's a huge difference as you can see 6.25 and 5 is a

huge difference that is 1.25 it's use difference but it's not

because of the accountant in u.s. are smarter than that counterparts in India

it's because of the different gaap being followed by the two countries now as per

the US GAAP revenue is measured as per the fair value of the economic benefits

which in simple term means that net discount and rebates while IGAAP that is

in in India is measured at the gross value of the economic benefits that is

inclusive of the cash discounts let's look at how the financial statement in

the two different countries in basically the two different countries

will look alike let's see the first is US subsidiary so in case of US

subsidiary the revenue from the operation will be shown as 5 million

so net profit will be also be 5 million but in India case what will

happen the revenue from the operation is 6.25 million right and the

expenses that will be deducted that is the cash discounts will be 1.25 million

which will give you your net profit as 5 million now you need to note that

though the net profit in both the cases are equal 5 million over here and

5 million over here they both are same right but the top line the figure

analyzed by the analyst is different by huge of 1.25 million as we analyzed so

if one word given the option to invest in one of the two companies he would

definitely would like to invest in the Indian subsidiary despite the

fundamentals in both the companies remain the same also it's important to

understand that though they there are huge differences between different gaap

but there are also various points of convergence so let's have a local final

the difference between IFRS and US GAAP see under IFRS inventory is valued

at FIFO basis and under IFRS the inventory cannot be valued on LIFO

however inventory can be valued at FIFO right first and first out basis but in

US GAAP it is LIFO method that has been used inventory is measured at

lower at cost or NRV but over here inventory is measured at lower at cost

or the market value if you see in terms of depreciation IFRS as follows the

component approach for the component approach for the depreciation that is

assets belong to the same component in US GAAP it is not amended there is no

compulsory thing or there is no compulsory approach for the calculation

of depreciation the same case with it goes with the revenue IFRS rules for

revenue recognition is general in nature universal and equally applied to every

company in US GAAP for revenue recognition our industry specific like

in manufacturing real estate oil gas it contains asset

set of rules and regulation in case of intangible internally incurred

development cost can be capitalized that is the research cost internally incurred

development cost can be capitalized but over here in US GAAP internally incurred

development cost are not allowed to be capitalized so after all of this we can

make some final conclusion out of this that there is differences that I've been

highlighted about and are just the tip of the iceberg and there are far more

other differences between IFRS in US GAAP this are far too technical depends

upon the facts and the circumstances of the transaction differences in each

principle may require an entire separate write-up but it is important to

understand the broad principle on which they differ US GAAP as highlighted above

is a rule based accounting principle whereas the IFRS as his principal basis

or universal in nature and it's also important to point out that us is stated

that it would adopt of convergence based principle in adopting the broad

principle of IFRS in your future so this differences have a huge impact

on some of the businesses and Economics have decisions like M&A and capital

raising foreign direct investments and etc depend upon the see so that's it

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